Shire to buy Baxalta for $32bn, shares gain

London-listed Shire Pharmaceuticals announced on Monday the purchase of US-based Baxalta for $32bn, provoking a mixed reaction from traders.

Shire would pay $18 in cash and 0.1482 Shire ADS for each of its rival’s shares, implying a price of $45.57 per share of Baxalta, above a previous bid of $45.23.

The price was equivalent to a premium of 37.5% over the price of Baxalta stock on 3 August, the day before Shire made its initial bid public.

That ratio would leave current shareholders in Baxalta with 34% ownership in the combined company.

Critically, after conducting extra due diligence Shire concluded that the cash consideration of $18 per share would continue to enjoy tax-free status.

Commenting on the deal, Shire chief Flemming Ornskov said the combination would result in the partner choice for rare diseases.

The transaction was expected to close in mid-216 and to be earnings accretive in non-GAAP terms in 2017, the first full year of ownership.

Together the two companies would have a “robust” portfolio of drugs, including 30 recently launched products with the potential for $5bn in sales by 2020, Shire said in a press release.

Annual operating cost synergies were pegged at over $500m by Shire, with additional revenue synergies expected and the combined effective tax rate set to come in at between 16-17%.

However, not everyone was enthused. One London-based trader said: “the main thing is that the uncertainty is over - the price seems about what was expected and if they do a good job of explaining the benefits then share price can start to recover but....i think we may see people using strength to sell if they still don’t like the long term prospects - best case would have been no deal.”

On a more positive note, another chimed in: “price offset by lower synergies vs expectations. Volatile initially, but my gut would be that stock trades weaker initially on arb flow, but on a longer term view looks attractive with pro-forma stock on 12.5x for 13% EPS CAGR 17-20.”

Although management made no comment regarding plans to initiate a share repurchase plan, for the deal to be materially accretive to Shire’s profits meant a large buyback plan would likely be necessary, analysts at RBC said.

Executives at Shire did leave clear their intention to refinance the $18bn bank facility they had obtained to finance the purchase, while also committing to rapid deleveraging over the 12 to 18 months after the deal was closed.

As of 12:58 shares in Shire were higher by 2.38% to 4,379p, giving it a market capitalisation of £26.7bn, and those of Baxalta up by another 5.42% to $42.18 in pre-market trading Stateside.

Before Monday's session, and since making its interest in Baxalta known, stock in Shire had fallen 25.4%.